India’s wealth management marketplace is
in a state of chaos – and that provides huge opportunities for
players, from home and abroad, to win business in a rapidly
evolving marketplace that could be worth $1 trillion by 2012.

Private client assets under management (AuM) available to wealth
managers in India will quadruple to some $1 trillion by 2012,
according to new research that confirms the attractiveness of the
Asian economy to the private banking business. Products, providers,
distribution lines, client segmentation and the regulatory
environment are all evolving simultaneously on the lines of
developed economies.

“The resulting chaos is full of promising opportunities,” declares
US consultancy Celent, in a sweeping new analysis of the country’s
personal wealth prospects.

Currently, total AuM in “organised” Indian wealth management are
estimated at $250 billion, and are growing at a rate reckoned to be
32 percent, Celent suggests.

“There is momentum towards more sophisticated customer
segmentation, products and delivery channels,” says Ravi Nawal,
analyst at Celent and author of its new report.

Personal wealth is being driven by India’s huge economic
development. With the liberalisation of its economy in the early
1990s, India experienced tremendous economic growth. Between 2000
and 2005, its GDP grew at 6 percent to 8 percent annually. The
country is expected to maintain its current GDP growth rate of 7
percent to 9 percent for the next five years.

Mass middle class

The Indian middle class is expected to number 600 million by 2012.
Consumerism across sectors, including demand for financial products
and services, is on the rise. This buoyancy is expected to boost
the financial services sector. It is estimated that by 2012 the
contribution of financial products and services to the country’s
GDP will be close to 19 percent.

Traditionally, Indians have focused on wealth preservation or
safekeeping rather than wealth augmentation. Key reasons for this
include the low level of Indian incomes and the fact that there
were very few low-risk investment instruments available in the
market, Nawal notes. Except for a few insurance companies, retail
banks and brokerages, most providers of wealth management services
have started operations in the last decade.

Today, providers are evolving from treating wealth management as
just another distribution channel for products and have started
operating it as a service line in which the ideal customer segment
size is one. Client preferences are also changing, and so are their
product inclinations.

What still characterises Indian wealth is its extremely fragmented
nature, Celent finds. The unorganised market is made up largely of
independent wealth advisers and small brokers/agents who double as
financial advisers. These unorganised players cater to a smaller
number of clients, have a limited portfolio of services to offer,
and lack any institutionalised processes or methodology to arrive
at the best financial strategy for their clients.

In addition, India has a large black market economy, with wealth
that is undisclosed and unaccounted for. Several financial advisers
have been approached by clients interested in bringing this money
into the mainstream economy, in a so-called ‘whitening’ of
wealth.

The unorganised market is 1.5 times the size of the organised
market at present. But a structural change is taking place, as
increased market penetration by “organised players is drawing
clients from the unorganised end of the market”, says Nawal.

The degree of fragmentation can be judged by the fact that a total
of 9,339 brokerages and 23,479 sub-brokerages are operating in
India today. Of these, 38 percent not only execute orders on behalf
of their clients but also provide advisory services focusing on the
equity markets.

Still, market segmentation remains complex. Providers of wealth
management services in India segment the market into four broad
categories: the mass market (investable surplus $5,000 to $25,000),
the mass affluent ($25,000 to $1 million), the high net worth ($1
million to $30 million), and the ultra high net worth (greater than
$30 million).

The lower rungs of this pyramid are clocking “tremendous growth” at
30 percent for mass affluent and 27 percent for the mass market,
and will continue to grow, according to Celent analysis. Although
the market potential across all segments is highly lucrative, it is
the mass market and mass affluent segments that “generate the most
excitement,” Nawal says. Banking institutions, financial advisory
firms, insurance companies and brokerages are all keen to establish
themselves in this end of the market.

 
Younger wealthy

For most financial institutions, owning this end signifies owning
the customer earlier in his/her life cycle. The demographics of the
Indian population clearly indicate that at least 75 percent of the
participants in the growth of these segments would be young working
class Indians in the 25 to 35 age group. Providers targeting the
bottom end of the pyramid are continuously introducing products
with lower entry thresholds. This includes life and healthcare
policies.

Nonetheless, nearly one-half of the wealth in India is owned by the
higher net worth client. At present, 48 percent of the contribution
towards the current $250 billion AuM total is from HNW and ultra
HNW clients, Celent data shows. Nawal estimates that the
contribution from the HNW segment will grow at 24 percent to 27
percent in the next five years. Contribution from the ultra HNW
segment will grow at 18 percent to 20 percent, while that of the
mass affluent will grow at 16 percent to 18 percent annually. What
Celent defines as the mass market is expected to grow at 12 percent
to 14 percent.

Managing such explosive wealth and luring clients into
Western-style advisory services will rapidly transform the bottom
lines of wealth management participants in India, Nawal contends.
The country’s wealth management and private banking practice
accounts for about 15 percent to 20 percent of revenues for most
financial institutions, made up of fee and commission-based income.
This is expected to rise to around 32 percent to 37 percent of
revenues in the next five years in most financial
institutions.

Active management

Active management will also become a feature of Indian wealth
management, the Celent research suggests. At present, 78 percent of
all assets under management of the HNW and ultra HNW segments fall
within the discretionary category where the wealth management
vendor works independently to help the client realise the agreed-to
gains within the constraints the client has set out.

“There has been a growing movement towards non-discretionary
portfolio management schemes,” Nawal says. “Enhanced product
awareness coupled with increased access to credible market
information has resulted in clients in the HNW segment becoming
more proactive in their portfolio management decisions.”

Several providers have understood this client need and started
offering the same services, limiting their role to an advisory
agency in such cases. With the growth of the self-service model
enabled by web-based technology, Celent expects an increase in the
non-discretionary portfolio management services business for these
segments. It estimates that by 2017, almost 35 percent of the
assets managed through vendors will be non-discretionary scheme or
a mix of the two.

Nawal says that it is interesting to note that in the mass market
and mass affluent segments of the market, where almost 80 percent
is non-discretionary, several providers are offering discretionary
schemes to differentiate their products. The analyst believes this
will pose its own challenges in scaling up and replicating service
lines across geographies for the mass market providers.

While most private banking and wealth management providers in India
profess to have adopted an “open architecture” approach, whereby
they claim to guide clients to the product and service best suited
to their financial strategy irrespective of the provider of the
product, it is far from reality, Celent finds.

All the vendors in the Indian wealth management space working on a
commission model with third parties are prone to push the products
with the best commissions. Over time, demanding and discerning
clients will push for a best-in-breed solution rather than the
best-in-class solution presently offered. Nawal contends that, as a
result, fee-based income models for providers will come into vogue,
more so than commission-based models.

Holistic view

Technology enablement to ensure that the clients and advisers get a
holistic view of their portfolio and are able to perform their own
what-if analysis with products from different vendor stables will
also emerge, he says. At the same time, a growth of new
distribution channels such as independent financial planners and
advisers and family offices will become features in India
wealth.

In the next five years, new products and services will “gain
traction” in the wealth management and private banking domains,
Celent believes. The market is likely to diversify in terms of
services and products. Key drivers that will lead to introduction
of new products and services include the need for differentiation
among providers.

Most product and service lines today are easily replicable among
the providers, so they are looking at new means to differentiate
themselves and rise above the pack. It is imperative that they
introduce new product and service lines catering to their growing
and varied customer base, Nawal says.

Indian clients, though behind Western clients in terms of awareness
and understanding, are coming up to speed in terms of
sophistication in understanding various financial instruments,
Nawal notes. They are also growing more demanding for better and
more focused services and product offerings. This is resulting in a
pull mechanism for providers to create customised products targeted
at their clients’ specific needs.

“This pull from the ultra HNW and HNW segments of the market is
likely to trickle down to the mass affluent segment for certain
products and service lines,” Nawal declares.

Financial institutions are responding to the new environment,
adding to the growth by creating offerings with low entry
thresholds for the underserved and unserved masses. For instance,
banks have introduced accounts without minimum deposit requirements
and deepening product portfolio targeted at the higher end of the
market. New offerings in structured finance, mutual funds, real
estate private equity, art and antique investments are being
introduced.

Players are also enlarging their footprints through expanding their
branch networks, creating automated kiosks for vending financial
products and partnering with the Indian postal network.

Clients are being educated and “sensitised” about various financial
products and services using innovative means such as street acts,
jingles, etc. In terms of asset allocation, equities still
dominate. Among the product classes available, equity and
equity-linked asset classes enjoy a 72 percent market share. With
Indian stock market capitalisations booming in the near term, this
asset class will continue to dominate the wealth management
portfolio, Celent believes.

Over time, rebalancing of the portfolio is expected, Nawal
suggests. Future growth areas are on the horizon. As a means of
differentiating their offerings and also catering to increasing
client sophistication, providers in HNW and ultra HNW segments are
expected to turn to hedge funds, private equity placements,
structured products, offshore investments and Islamic
finance.